The Future of D2C Brands
Charting the next evolution of the D2C playbook
Direct-to-consumer (D2C) brands have altered the consumer brand landscape, and are capturing significant share across categories — 20% in mattresses, 15% in shoes, and 12% in razors. Since 2012, over $4 billion in funding has been invested into D2C brands, and in the next five years 40% of consumers expect D2C brands will comprise four out of ten of their purchases. In true fashion to digital era disruption, phenomena evolve as quickly as they begin, and we’re already seeing major shifts in the D2C playbook. In fact, the term “direct-to-consumer” is already outdated given how D2C brands have transformed the way they go to market.
Many D2Cs launched and grew exponentially under favorable market conditions that lowered barriers to entry, such as easy access to capital, arbitrage opportunities within digital and social advertising, and flexible supply chains. The result was the rise of the long-tail, where instead of relying on third-party sales channels to achieve scale, D2C brands used the spread achieved by bypassing traditional retail models to invest in driving audiences to their e-commerce site. But with ad costs rising, the marketplace flooding, and growth plateauing, only the D2C brands with sustainable operating models and underlying economics, namely cost of acquisition (CAC) and lifetime value (LTV), will survive.
We examined the current state of D2C brands, including the D2C playbook and what incumbent brands can learn, in part one. In this follow-up, we’ll address how the D2C playbook will unfold given the way consumer behavior and the marketplace are evolving.
HOW D2C BRANDS HAVE CHANGED THE GAME
Regardless of how many D2C brands survive the next few years or reach $100 million in sales, they have permanently altered consumer expectations around service, personalization, and value, and set a new standard for how brands can create deeper connections with consumers.
D2C brands have changed how consumers assess tradeoffs in price and value. They stripped away everything “unnecessary” to consumers, including intermediaries, mass marketing, and the brand tax, and passed those savings along to consumers, resulting in products that are often higher quality and lower priced than market incumbents. Consumers no longer have to choose between convenience and luxury, since D2C brands offer both. Incumbent brands can no longer rely solely on a recognizable brand name to increase willingness to pay, especially without substantial product innovation — consumers see through it and know they can get better for less elsewhere. As we move beyond in-person shopping to e-commerce, consumers will increasingly compare brands less on product specs (it’s table-stakes to be on par with industry) and more on higher-order brand attributes.
As trust is challenged across nearly everything a consumer touches, from media to social causes to environment, consumers are doubling down on the brands they trust most. They’re choosing to affiliate themselves with fewer brands, building deeper relationships with the ones that best reflect their values and aspirations. Many D2C brands are purpose-driven upon inception, and build trust through online and offline touchpoints with things like transparent pricing and data transparency. Incumbent and D2C brands alike have an opportunity to evaluate how their audience defines “trust” and what their brand is trusted for, and use those insights to tailor products and communications accordingly.
Many incumbent brand portfolios were designed to maximize shelf space, with many sub-brands offering comparable products within the same product category (for example, L’Oréal USA offering mascara under L’Oréal Paris, Maybelline, and Garnier sub-brands). D2C brands disrupted this convention by establishing one best-in-category product, making it substantially easier to shop. Consumers have come to trust that D2Cs will curate the product experience that satisfies their price-value tradeoff, and buying a D2C brand’s product implicitly transfers decision-making from the consumer to the brand. Multi-brand portfolios with little differentiation within category feel overly complicated, and in the digital era, if consumers don’t immediately find what they want, they will seek alternatives. This could result in incumbent brands narrowing same-category portfolios in line with the example D2Cs have set.
THE FUTURE D2C PLAYBOOK
D2C brands are connecting with consumers in new ways and, more importantly, have disrupted each link across the value chain, from business model to product, from go-to-market to media, to experience and service. Going forward, we expect D2C brands to continue to evolve across the value chain in order to future-proof business and operations.
Here are some predictions of how the D2C playbook will evolve:
BUSINESS MODEL
The D2C business model will move toward consolidation to regain leverage
D2C brands, by definition, started by bypassing traditional retail models in favor of direct sales channels, enabled by flexible supply chains and cloud-based data storage. Because many of these brands, especially those with high VC investment, rely so heavily on direct channels and are mono-brand/category, opportunities to drive cost efficiency or vertically integrate are limited. To regain leverage, business models will evolve toward bundling, in the form of retail consolidation, new holding companies, or brand-led consortiums, that help drive long-term efficiency.
New retail models such as Neighborhood Goods, Bulletin, Commerce Cream, and Re:Store consolidate many D2C brands under one “roof”. Mavely, a new multi-brand D2C retail platform, notes that brands have been able to acquire customers for 30–50% less than Instagram. Entrepreneurs have taken note of the fragmentation within the D2C landscape, and are creating a new class of holding companies that aim to use scale as leverage, such as the dtx company. Similarly, D2Cs could band together bottoms-up and form their own organic brand-led consortiums, which could look like a more formal, involved agreement than the cross-promotion partnerships and brand collaborations we see today, such as Bark and Glossier teaming up on a limited-edition line of dog toys (and who knows, they could very well be testing the waters of a deeper affiliation!).
PRODUCT
D2C products will extend to services with higher LTV and market potential
D2Cs cut through the consumer brand clutter by developing lighthouse expertise in a niche product category, under the banner “luxury for less.” Even with recurring revenue from products with repeated usage (think razors) or subscriptions, it’s challenging to turn a singular physical product into a nine-figure business. The first phase in D2Cs’ expansion was launching products in adjacent categories; for example, Away is exploring in skincare, supplements, and loungewear, in effect expanding their lifestyle positioning and driving frequency for brands whose products have a longer purchase horizon like luggage.
The next phase will involve launching services that remain true to the product core, allowing D2Cs to build longer-term, higher-margin relationships with consumers beyond the initial product purchase. Take Quip for example: the market for dental products is between $10 million and $15 million, whereas the dental insurance industry is $130 billion, which helped inform Quip’s decision to launch a dental insurance service. Expanding into services requires new talent and capabilities, but for many service categories which lack digital innovation, D2Cs are well suited to apply their digital expertise to disrupt services.
Go-To-Market
D2Cs will go to market with reimagined offline touchpoints powered by online data
Born on digital, D2Cs used go-to-market tactics like brand advocate programs, second-party data co-ops, and product launch waitlists to gain new types of data on consumers and build “humanity” online via advanced targeting and their e-commerce offering. But digital alone isn’t enough — consumers feel digital marketing is increasingly anonymous, and desire a relationship that extends into their physical lives as well. D2Cs have started addressing this need for physicality and building humanity offline with retail spaces, which act as marketing channels and experience hubs. For example, Outdoor Voices stores host a weekly run club, and Casper’s The Dreamery allows people to rent space to nap.
Going forward, D2Cs will reimagine physicality, using the intimate behavioral and psychographic data they have on individual consumers to build differentiated, lifestyle-driven offline experiences, with IRL consumer touchpoints like community-powered print magazines, personal shopping concierges, panels and workshops, and in-store exclusive product drops. These offline brand touchpoints will be informed by and connected seamlessly to online experiences, and will feel deeply personal and “designed for me” as a result.
Media
Media spend will diversify beyond the duopoly of search and social platforms
D2C brands achieved breakout growth by advertising on digital and social channels, especially Facebook, Instagram, and Google Search, which historically made up 75% of their marketing budget. With so many brands trying to reach the same subset of urban, affluent consumers via the same marketing channels, customer acquisition costs have skyrocketed, and ads are becoming less effective. According to Adstage, the median CPC for a Newsfeed ad has increased 49% from Q2 2018 to Q2 2019. At the same time, according to Trust Insights, brands have seen an 18% engagement decrease on Instagram this year, while influencers are experiencing a 44% engagement decrease. Seeking mass market growth, D2C brands such as Peloton and Brooklinen have increased investment in above-the-line channels like television and out-of-home; while these channels have scale, their measurement capabilities are not as robust as digital channels, so D2C brands have a tougher time tracking the return of every dollar spent.
Media spend will continue to diversify away from dominant social channels, in line with consumer attention, to platforms such as Quora, Reddit, Pinterest, and TikTok. Recognizing opportunity beyond the digital duopoly, Pinterest is building D2C-specific tools like conversion optimization, and spun up a sales team dedicated to D2C brands. Addressable television and digital out-of-home present additional opportunities to advertise at scale while maintaining digital-style optimization and targeting. As D2Cs add additional channels and partners to their media mix and balance mass and performance channels, growth will depend on their ability to link messaging exposure to purchase throughout the consumer journey via full-funnel modeling.
Experience & Service
Customer service will become hyper-personalized and privacy-positive
D2Cs have innovated in the way they service consumers and deliver post-purchase experiences, whether that’s through AI-powered product education via chatbot or best-in-class loyalty perks. D2C brands have set a new standard for quality, timeliness, and accessibility of customer service. As D2C brands continue to learn more about their consumers, they will be better able to address needs post-purchase and deliver hyper-personalized customer service that spans online and offline behavior.
Beyond hyper-personalization (and potentially at odds with it), consumers’ demand for privacy has become more pronounced in the past year, especially on social platforms. Expect to see a shift away from public-facing service models, like Tweeting questions at a brand, to more private modes of communication such as messaging apps. Jetblack, Walmart’s texting-based online shopping concierge service, and Facebook’s forthcoming messaging app for close friends, called Threads, are good indicators of the types of private modes of communications consumers will be expecting to connect with brands.
By focusing on consumer pain points and building insights-driven products and experiences, D2C brands have been able to exploit margin opportunities and amass share and cultural relevance. Maintaining this consumer centricity will be key as D2C brands continue to seek growth and build sustainable businesses.
